Astronics Corporation (ATRO) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Astronics Corporation second quarter 2014 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Deb Pawlowski, Investor Relations for Astronics. Thank you Ms. Pawlowski. You may now begin.

Thanks, Manny, and good afternoon, everyone. Thanks for joining us today and your interest in Astronics. On the call here is Peter Gundermann, our President and CEO; and Dave Burney, Chief Financial Officer. Pete's going to first go through with his planned remarks, and then we'll open the call for questions-and-answers. And you should have the news release that went out this morning and it is available on our website at www.astronics.com. As you are aware, we may make some forward-looking statements during the formal presentation and the Q&A portion of this teleconference. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the earnings release, as well as in documents filed by the company with the Securities and Exchange Commission. These documents can be found at our website or at sec.gov. So with that, let me turn the call over to Pete. Peter?

Thanks, Debbie. And good day, everybody, and thanks for tuning in. As usual I'm going lead a discussion talking about our recently released results today, covering both the second quarter and year-to-date, and then go through a brief overview of what our expectations are for the rest of the year. I think as an overview, the second quarter was interesting in a number of respects, one of which is that it was actually our first quarter in a year where we didn't have any major M&A activity. We have been acquiring companies in the third quarter last year, about a year from now, a year ago today, and fourth quarter and first quarter. So second quarter was the first time where the dust settled a little bit and the company ran with its current slate of business, and got a chance I think to kind of show what it's capable of. And we're pretty pleased with the quarter, and we hope you are too. The topline results were very positive. Revenue was great at $174 million substantially, beating our previous record, which was the first quarter of this year at $140 million. We were up 146% over the comparative quarter of a year ago, when we had second quarter 2013 revenue of about $71 million. Stripping out the effect of the acquisitions, our organic growth in the quarter over a year ago was 14.1%, which we're reasonably pleased with. Bookings also for the quarter, we felt were pretty strong, there were $139 million. That's the second best in our history only to the previous quarter, quarter one, where we had bookings of $146 million. And that gave us an ending backlog at the end of the first half year of $327 million, which we feel sets us up pretty well for the second half. Talking down the income statement. The margin profile as has been our situation is somewhat complicated, because of the inventory fair market write-up rules related to purchase accounting. These rules basically mean that inventory that's on hand, when a company is acquired, gets written up to market value. And therefore tends to depress the production of goods, as that inventory is consumed shortly after the acquisition. Our second quarter gross profit reported per GAAP was $43.2 million, which was 24.7% of revenue, which is just slightly below our two-year rolling average of 25.1%. And our net income, again per GAAP was $13.1 million, which is by far and away a new record for us. Previous quarterly record was the first quarter of last year, when we reported net income of $8.5 million. So we jumped from $8.5 million to $13.1 million. That $13.1 million is 7.5% of sales and very close to again our rolling two-year average of 7.7%. But in those numbers is that inventory write-up expense, which we estimate to be about $8.7 million, again in the second quarter, the same as the first quarter, which is about 5% of sales and it's taken right off the gross margin line on our income statement. So our cost of goods is basically inflated by this treatment of inventory write-up expense by $8.7 million. So those inclined can get an estimate of what our income statement would look like by adding $8.7 million essentially to the margin lines going down to the net income line, where one would have to take into account the tax effect. And we helped you with that by saying in the press release that our earnings per share of a reported $0.70 per diluted share for the quarter is after an inventory write-up expense of $0.32 per diluted share. So a pretty substantial bottomline impact by this inventory step-up expense. The good news we feel is that even with this inventory step-up expense, our income statement held together pretty well, and going forward we feel like it's largely behind us. We feel that we are estimating a $2 million or $2.5 million inventory write-up expense remaining to be recognized over the rest of this year, and the majority will be recognized in the third quarter. We do not publish EBITDA margins. We know there are various ways of doing it. We try to make it easy for other people to build models the way they want to. But in addition to that $8.7 million inventory write-up expense, we published interest expense of $2.56 million, which is up substantially from last year, when we had interest expense of $262,000. Depreciation and amortization expense of $5.5 million, which is up substantially from last year's $1.7 million. And we can answer questions about other items on our income statement, when we get to the question-and-answer period going forward. In terms of the E&D expenses for the quarter, they were $18.4 million, that's about 10.5% of sales. And we talked last quarter about the likelihood that that number as a percentage of sales is going to drop from our historical levels of about 15%, 16% to something lower, and we see that happening again in the second quarter. For those building models, 10.5% is a pretty substantial reduction. And it's not by policy necessarily, but the way our business is evolving, we see staying at that level pretty much for the remainder of this year as far as we can tell. So kind of 12% somewhere in that range would be we think a pretty good estimate. Year-to-date through six months, the first half we feel has been very strong. Revenue was $315 million, up 118% over the first half of last year, when we had revenues of $145 million. The organic element of that growth was 12.5%. Net income per our published numbers was $20.7 million or 6.5% of sales. That compares to last year to $13.7 million or 9.5% of sales, but again this year we're dealing with the pre-tax effect of inventory fair market value write-up of the total of about $17 million, pretty substantial. We estimate that that has had an after-tax cost on a per diluted share basis of $0.61. So we reported the $1.09 per diluted share after that $0.61 expense, which compares favorably to the first half last year, when we posted $0.75 per diluted share. Engineering and development expense, again, for the first half was $35.6 million, that's 11.3% of sales, again substantially below where we've been running of 15%, 16%, 17% historically. Year-to-date bookings were pretty strong, $285 million, that's 90% of sales. Our most recent acquisition of our Test Systems business in Irvine came with a $143 million backlog. So our total contributions to backlog in the first half, including bookings and the Test Systems backlog were $428 million, leaving us again with a backlog at the end of the second quarter of $327 million compared to our backlog at the end of the first half last year of $114 million. Talking about our segments briefly, year-to-date numbers. Aerospace revenues for the first six months were $244 million, that's up 74% over last year, and makes up 77% of our total. So we're three-quarters Aerospace at this point and one-quarter Test Systems. Our Aerospace sales are largely dominated by commercial transports. That has been our trend, will continue to be our trend, as best we can tell. 62% of our consolidated sales for the commercial transports, military and business jet are quite a bit smaller at 7% and 6%, respectively. Our operating profit in the Aerospace side was 15.7%, down slightly from last year, due to the step-up expense related to some of the acquisitions late last year. Our markets and product lines remained strong. And for the second quarter now we're using a new classification system, so comparisons to the past are a little tricky. But our electrical power and motion sales year-to-date are $126 million. Electrical power and motion consist of electrical systems for aircraft, electrical distribution for cabins and seat power systems, seat motion systems. Those sales are up 46% over year ago, and make up 40% of our total sales. Our lighting and safety product area, which includes all of our traditional lighting products and most of the products from our PECO acquisition, in the cabins of commercial transports were a total of $75 million for the first half. That's up 100% from the comparative period and 24% of our total revenues. And then our avionics product lines, we have a series of smaller product lines that make up avionics, $25 million for the first half, 8% of total, and up 160% over the comparative period. So numbers that we don't typically put in the press release, but I know people are going to ask about it. Our cabin sales for the second quarter were $47 million, that's up 30% from $36 million in the second quarter of 2014. One of our largest customers traditionally, Panasonic, was $26 million of revenue for the quarter, 15% of our total. And Boeing, our other traditional major customer was $24.4 million, 14% of total. The one announcement we had of some substance in our Aerospace side during the quarter was during the Electrical Power Distribution System for the TBM 900. TBM is an airplane made by a French company called Socata, that's a turboprop, single-engine turboprop. And the thing I think I'd like to point out at this point about that is that we have been investing pretty heavily in our, what we call our EPDS, Electronic Power Distribution capabilities. And what's exciting to me is that with this announcement, TBM announcement, we have shown a capability to contribute technically to a very wide range of aircraft, not only jets which we've talked about quite a bit, not only helicopters, which we announced relatively recently, but now also turboprop. So when you cast that net around that range of types of airplanes, it makes for a pretty big target audience, so to speak, for where this product might go, where this technology might go in the market as we move forward. So moving to our Test Systems segment. It's pretty exciting times here. Revenue year-to-date of $71.6 million, that's kind of fairly up from $4.5 million last year. That's according to our table in the press release, a whopping 1500%. Test Systems for the first half was 22.5% of our total revenues. Our segment analysis shows an operating profit of 3.2%, but the fair market value, inventory write-up, substantially reduced that our operating profit to the tune of about $15 million. So to get a sense of relative contribution of Test Systems, you need to keep that in mind. Again, we expect that rate to drop dramatically here going forward in the third quarter. When our Q is released, we will show a significant customer. That customer -- actually our new practice in our Q will not be the named customers, but rather do that in our K statement at the end of the year. That's in part due to discussions with customers and their preferences and in part due to a revision of our own internal policies. But that significant customer, you will see had sales of about $40 million in this most recent quarter. Our balance sheet, we feel it's pretty healthy at the end of the second quarter, cash of $21 million, total debt of $246 million, and a net debt of $225 million. That is after we have paid down $26 million in principal on our outstanding credit vehicles. And finally, looking forward, what do you expect for the second half of this year. We are tightening and slightly increasing our revenue guidance for the year to between $640 million and $665 million, that's up from $625 million to $660 million. We're expecting Aerospace to be $485 million to $505 million. We're expecting Test Systems to be $155 million to $160 million. The midpoint of our consolidated range would be $652.5 million. If we were to hit that, that would represent an increase of about 91% over our 2013 consolidated sales when we did revenue of $340 million. Given, we're halfway through the year. This revenue target implies average quarterly shipments going forward of about a $167 million. We are expecting that based on scheduled deliveries at this point, the third quarter maybe relatively high compared to that average and the fourth quarter maybe a little bit lower, maybe 10% or 15% or so. But there is room for that to change clearly. But we think that that range of $640 million to $665 million for the year is pretty solid. Again, we expect a significantly reduced inventory step-up level for the rest of the year, $2 million to $2.5 million total. We expect our capital expenditures over the course of the year to sum to $40 million to $44 million. The largest portion of that by far will be a new facility and bunch of related equipment that we're putting into our new PECO facility in Portland, Oregon. And we expect those total expenditures to make up $27 million of the total. And again, for the model makers out there, we expect our third and fourth quarter engineering and development expense to be kind of consistent with our second quarter and somewhere in the 12% and 12.5% range. It's probably a good number to work with. I think that concludes my prepared remarks. Manny, let's open up the lines.

(Operator Instructions) Our first question is from Tyler Hojo of Sidoti & Company. Tyler Hojo - Sidoti & Company: So I guess just go right to the elephant in the room. Tests Systems, obviously was a very strong quarter here. But when we look at the bookings and the potential that you actually saw a little bit of pull-forward from 2015, can you help us at all in terms of how to think about the sustainability of that business as we start moving into 2015?

It is the elephant in the room. That's the elephant in a few rooms actually. We talked before about how we had a pull-forward from 2015 into 2014. We are here to deliver product when customers want it. So we will do that. And our belief is that the prospects that exist in the market are strong enough to support this business in a meaningful way going forward. Are we going to annualize and grow from current levels? That's really pretty hard to say at this point. It could well be, that the lumpiness that we have described before will come into play in between these big orders. I mean, the way I think about this business and the way we play in it, is that it's a little bit like a camel, I guess, where it's made to go long distances without getting a drink. But when it gets a drink, it's a big drink. So the effect of the increased emphasis on the Test Systems business for Astronics will be to make our results a little bit lumpier than our traditional Aerospace businesses. And that means that we may have times of feasting and times of relative famine, but we think long-term there are substantial opportunities out there. And we certainly don't expect that business to go down the tubes and wither away next year in 2015. So I think it's worth watching those quarterly bookings in particular. I will tell you that I am not at all surprised, where we ended up in terms of bookings this quarter, because you kind of know when you're getting close, and it's not going to be one of those businesses where every quarter bookings match shipments. I think it's one of those businesses where once a year, we're going to have a booking that's going to far exceed shipments and provide the foundation for the business going forward for the next year. So we'll give as much guidance to that as we can. And given that we're in the middle of 2014, we're not in the habit of talking about 2015 in much detail, and we're not prepared to do that today. But I can assure you, Tyler, that when we bought that business, we did a survey of customers, we talked to a handful of them and we got a sense for the long-term range and the long-term opportunity, and we decided to go forward. And I'm not second-guessing at this point. I actually think the strength it shows through in these financial results should get people excited at what this business is capable of. Tyler Hojo - Sidoti & Company: I mean there is no doubt that the operating performance is very impressive in Test. I guess just as a follow-up though, when you look at your, I guess the $40 million customer that you're not going to name until your K, at what point do they give you kind of visibility? I mean, is it more of a, book-and-ship, sort of business or do you tend to have order visibility going into the next year?

I think we'll have order visibility. Obviously, it's a pretty close relationship. They're not at this point willing or able to commit to next year. So if they were to be directly open with us, I'm not sure how much we could take that to the bank. So at this point we're executing and focusing on a pretty substantial ramp and so are they. And the best thing we can do is make sure that that performance goes well, because we do believe that there are opportunities to further have this program run. So the worst thing we could do is under perform. We're not inclined to under perform. We think it's going pretty well. And as best I can tell our customer feel so also. Tyler Hojo - Sidoti & Company: Just I guess moving to something else. Could you maybe talk a little bit more about in-seat power? How are the narrow-body retrofits tracking as a percentage of kind of the total cabin electronics volume? Is that becoming a more meaningful piece today?

Yes, I think it is. And it's also becoming -- the quoting activity is remaining healthy. So we're pretty pleased with that. I know you're pretty familiar with the numbers. We are definitely of the opinion that we're somewhere south of that 10% total installed base, penetration rate at this point. And a lot of narrow-body airplanes get built every year. So we think that's a meaningful opportunity. And it's a little hard for us to track exactly what products are going narrow-body and what products are going wide-body, because the products tend to be fairly modular. And many of our customers operate a wide range of aircraft, so we don't always know where they're putting it, but as best we piece it together that trend is continuing. And the airlines that are doing it are reporting a high-customer satisfaction rate, which is the most important thing from our perspective. And we think we're in a good shape on that. Tyler Hojo - Sidoti & Company: And just lastly, just want to talk about how the Aerospace acquisitions are tracking. I guess just the numbers you provide in the press release, $6 million of operating profit on $42 million in sales, so the contribution margin is lower than kind of the core margin for that segment. What's going into that? Is something tracking a little bit differently than you had originally anticipated or is it just really more AeroSat and kind of the ramp associated there?

Well, it's a good question. I guess, I'd say there is some ramp issues at AeroSat. I mean that's a project in the making, but we're making a lot of progress there. And we think that it's going to be an exciting second half to the year. It's a very active place, I can tell you that. But I guess we feel like the acquisitions in general are tracking as low as we'd hope. In fact, everything is kind of moving more or less as we expected. As the business gets bigger, there are more moving parts and more things can popup either on a positive side or negative side. But I can't tell you that we're surprised anymore with the new businesses than we are maybe with the old businesses. So I think things are tracking the way we wanted them too.

The next question is from Kevin Ciabattoni of KeyBanc Capital Markets.

Pete, you mentioned in Test you mentioned getting large orders kind of lumpy. Just kind of wondering what drive those orders from your customers? Is it typically new product introductions by from either your end or from the customer's end or is it factory upgrade? Just kind of trying to get a grip on what the typical drivers there are?

I think the way to think about it is that it's typically driven by a customer's recognition of the capability that our systems can offer them, and then their implementing those capabilities on a widespread basis. So our customers tend to be pretty large organizations either in the military or in the commercial sector. And when they embrace our technology, they're typically not buying one or two or three, they're typically buying and standardizing and implementing the technology across a relatively wide user base. So it tends to be a large order. And it tends to be an order, which has more a program, which has more of a beginning and an end to it and doesn't go on forever and ever and ever like building 737 for example. So that's what makes that business more incline towards large orders and it helps explain why it tends to have maybe a little bit more of a lumpy aspect to it.

In the Test business, I mean, can you give us an idea of what kind of volume you need to see to keep those margins I guess accretive to the overall corporate margin? I mean obviously, if you look at an adjusted basis, x the inventory step up, you're approaching the mid-20% on operating margins here this quarter. I mean I think in the past you've said, it's kind of in line or slightly above corporate margins. Just wondering what kind of volumes it would take on the topline to maintain that?

I can tell you, we're very focused on that right now. And Dave, I don't know if you want to chime in on this one. But our major focus is managing this particular program, which is consuming a lot of waking hours and we think there is tremendous leverage there. I guess from my perspective, it's a high variable cost business. So it can act a little bit like an accordion and ramp to pretty high levels or shrink to pretty low levels, depending on what the workload is. Obviously, there are financial ramifications to that, but I think the answer to your question, kind of a breakeven level is not something we spent a whole lot of time with at this point. Dave, I don't know if you want to clarify that at all.

That's true. The business will be the operating income like the rest, like our Aerospace business is highly dependent on the topline. There is relatively fair amount of fixed cost that don't go up or down with the increase or decrease in sales. So that's the thing to watch. And I would say to see where it settles out in the long run. But as Pete mentioned earlier, we expect a fair amount of cyclicality to the new Test business going from quarter-to-quarter, and we're still getting our feet on the ground to see where that shakes out. But in the long run, I would expect the operating margins over a long period of time to be in that range, where we see the rest of our business in over the long run, but we'll have quite a bit of variation from quarter-to-quarter I think.

Shifting gears to the Aerospace side of the business. Saw a bit of a mixed shift this quarter between the lighting and tower pieces of the business relative to last quarter. It looks like tower motion was down a little bit sequentially, lighting was up. Just kind of wondering if there is any puts and takes or kind of product-specific commentary you can give around that?

No. I guess I would view that as kind of a normal fluctuation and variations quarter-to-quarter, nothing newsworthy.

And then, we've seen some cautious language out of the European carriers, and we saw Lufthansa and Air France. Does the airline profitability in Europe, I guess specifically impacts your longer-term outlook, especially for power installations? And I know most of your work at least upgraded on their bodies is domestic, that's kind of been one of the big growth areas. But just wondering, given the discretionary nature there, if you've got any concerns longer-term?

Well, first of all, let me correct you a little bit. We do a lot of work domestically for sure, but we also do a lot of work in Europe, South America and Asia. I mean they are all very important markets to us. And the North American Airlines actually were well behind most of the airlines in the rest of the world a couple of years ago and have recently kind of caught up a little bit with activity. But I wouldn't characterize as if dependent on North America more or so than the rest of the world at all. Obviously, from our perspective it's helpful to have profitable customers, because that is discretionary. And not only that, but it add some amount of weight, which cost them money to operate their fleets. But I think our perspective is that the demand for the product is so overwhelming that we haven't sensed any kind of concern like that. That's any kind of change from what we've been seeing for the last few years. Definitely true, that different airlines have different personalities and they'll prioritize things differently, and that will always be the case. But we don't see a shift necessarily based on economics, where people who were optimistic are all of a sudden getting a little more pessimistic. And I don't think that's an accurate diagnosis of what we see in the market at all.

And then, last one, just a housekeeping question. Any guidance you can give on the rest of the year in terms of the tax rate, it's been pretty higher here in the last two quarters. Just kind of curious where is it going for the rest of the year?

Dave?

I assume you want me to answer that, Pete.

Yes, you can answer that.

We're planning for a rate of about 34% for the balance of the year. It's higher than what we've seen in recent history. The main driver of that increases are 1% to 2% increase, because of the lack of the R&D tax credit right now. If that R&D tax credit gets puts back into place, we'll see a drop by 1% or 2%.

The next question is from Ken Herbert of Canaccord.

Just wanted to follow-up. The Aerospace margins, Dave, when you back out the acquisition impact were pretty impressive over 18%, 18% to 19%. Is that a sustainable range or was there anything you saw this quarter in particular with the legacy Aerospace product that may have contributed?

No. I think the quarter was a, what I would describe as, a pretty typical quarter for Aerospace. We had good solid product mix. And there was nothing unusual in there.

For the second half of the year, that's I guess, a run rate that's reasonable to expect?

I don't see anything that I would expect any significant change in there. One of things that Pete alluded to earlier is that, the engineering cost are becoming less as a percentage of our revenue, as our topline has grown more so than our engineering cost, which is part of our cost of goods sold. So that plays a part in it too.

And then, Pete, you had some good reduction in the debt this quarter, a nice step-up there. Can you just remind us again from a leverage standpoint, sort of where you stand now? And I know the priorities going to continue to be investing in the business from a growth standpoint, but anything we should read into the payment on the debt this quarter and any implications moving forward from a leverage standpoint?

Dave, I think I'll let you answer that one instead of correcting me afterwards.

I wouldn't correct you. I am sure, you would answer it. But our objective this year, going into the year, knowing that we were going to begin the year with more leverage than what we have had typically was to use our excess cash flow to reduce that debt level, pay down our draw on our revolver, and kind of reload ourselves and get ourselves some more dry powder going forward into the year. We are up around 3x leverage, 3x EBITDA. And I'd like to get down and stay below 2x, and be ready and flexible in our capital structure. And that's the mission for this year with our excess cash.

But Ken, I think the tone of your question was accurate, and that we're not starving the business or cutting expenditures for the sake of paying down that debt. The other term Dave used excess cash is the important one here. We are continuing to invest and go after opportunities as we see them, but instead of sitting on cash we don't necessarily need, we're paying down that debt and preparing ourselves for what might come next. I mean opportunities come and opportunities go and we want to be as prepared as possible for when something comes up.

And then finally, with the, I think you said $27 million you're paying this year for the movement of the new facility for PECO, and I am guessing that that move is, if not happened, happening very soon. Just any update on the progress there? But then more importantly, any commentary you could provide from a competitive and cost basis standpoint, perhaps the magnitude of this move and what it might do from a competitive situation for PECO, as you look to continue to build out there with your primary customer?

That's a good question. And some things are easy to dream about, but a little hard to quantify. I think the compelling reason for the move would be obvious. If I could show you the facility that the company is operating in currently, it's a very old facility, dating back to, I'm trying to think, like 1910 or something, maybe 1920. It's pretty old. And the company has done a really good job operating out of this facility, but it's just less than optimal. And so we are wondering what this might do. I would tell you that in today's world, it would be very difficult for the company to attract a customer like Boeing, given that old facility. But obviously, they did that a long time ago, so don't have to worry about it right now. But to the extent that we want to expand the business to other customers, which maybe PECO hasn't traditionally reached out to, we think a new facility, and the economics, and the flexibility that all go with it are pretty important to that process. So that's all part of it. As far as timing goes, we actually have not -- we're doing a lot of work. The building is empty. We're putting in new lighting and putting in new pads for equipment, and laying it out and getting all the utility stuff done. But we're not actually planning to move into in until the tail end of this year. So we actually haven't relocated anything yet.

And should we expect in the latter part of the year when you move any maybe inventory build or other issues from a contingency standpoint as part of that process?

Yes, there probably will be. We don't expect that that will be a critical element. It happens that the company, shortly before we bought it, was operating out of three facilities. And they shut down one, which was fairly substantial and moved into an expansion of the current facility in terms of lease space. So they have a pretty good track record of working with their big customers and executing those moves successfully. Well, account to that move went really well, and from my perspective that serves as a pretty useful training ground going forward. So yes, we will build some product ahead of time. We'd expect that to flush through in relatively short order. So I wouldn't expect it to be something that materially affects our financials. But it could boost one quarter or hurt another one. We'll also see how that plays out specifically when we get there.

The next question is from Dick Ryan of Dougherty.

Pete, can you give us a sense of what AeroSat contributed as part of avionics in the June quarter?

I think it's safe to say that it was negligibly profitable and not a major contributor. I am anticipating your next question in terms of where we are with the variety of STC programs that we're working on. And I think it's safe to say, we're pretty pleased in the commercial transport sector. We're probably completely done with two-thirds of those initiatives. So we're at the point where shipments are expected to ramp up in the second half year along with orders. And we will kind of finish the details on the remaining STC efforts, those are a little bit complicated due to some unique circumstances, but I guess I'd expect them to be resolved certainly by the end of the year. And we'll have that all behind us. But like I said earlier, that I think the progress that we're making there organizationally and capability-wise is solid, and it's measurable. And it leaves us more or less where we thought we would be recognizing that we have a lot of work to do here in the second half.

With the STCs in hand, I mean you've given some guidance in the past for AeroSat, would that still be a reasonable range with the STCs in hand?

I don't think we're changing that. It maybe weighted a little. It's going to be weighted more to the second half than it was in the first half just due to delays all the way around. And one of the things you run into is the airlines like to keep their airplanes in the air in the summer, when load factors are high. So scheduling from that perspective, once the STCs were granted, it took a little bit of a hit, but we would expect that activity to pick up in the fall here.

Performance-wise what's fielded, how is that doing?

I think, overall, we're doing pretty well. There definitely are issues occasionally from time to time, but these are pretty complex assemblies that operate in the pretty harsh environment. So that is not necessarily to be a surprise. None of the things that we've seen are things that concern us, the kind of feeling when you're thinking it may have some kind of very significant issue to address, a little more kind of onesies here and onesies there. And to some extent they are learning curve issues with installation houses. So we've seen some problems there, where things don't necessarily get installed correctly, and we have to fix it later when something breaks because of it. And so there is a lot of that going on, but nothing that we would consider alarming or out of the ordinary for this kind of product.

A couple more on the Test side. Obviously, the large customer you have is highly customized, but are there other commercial applications that you can utilize some of that technology for or is that just a pretty narrow niche that you can address on the commercial side with just the one customer?

As the product is configured, it's highly unique to that customer, and it's very much a joint effort. And one of the things that we do well is work with customers very closely. So if you're to try to carve out the IP as to what belongs to who, it could be a pretty complicated cut, when you look at that particular machine. But the capabilities that we bring to the party, we think are applicable to other industries and other customers within those industries. So part of our mission, obviously, long-term is to explore those opportunities. And one way to reduce this cyclicality and the lumpiness of the business is to expand the customer base and the program base. And I think we're going to be able to do that. I think it may take some time, but I think we got a lot of capability and capacity and potential with this acquisition. So given what we've seen over four months now, and given what we expect to see over the rest of this year, we're pretty pleased with it.

How about on the non-commercial side, I mean back to its core capabilities, is that 2016, 2017 sort of opportunities or is there something more near-term that could kick in?

Yes. It's a good question. And I'm going to give you a vague answer unfortunately, because this is such an unpredictable climate. But just like us, they have historical relationship with certain branches to the armed services and there are certain known needs. And there are plenty of customers, who would like to have something and have something now, but the funding environment just doesn't support it. So your question is really one of, when is the funding environment going to change or when is the need going to get so unbearable that they absolutely have to do something, and that's just really hard to predict. But we haven't seen anything certainly in the last 90 days that has changed that environment dramatically.

One last one. The EPDS side, good progress, jets, turbos, helicopters. When should we start looking for contribution on from that segment?

Well, that's a good question. We need some of these airplanes to get flying in quantity. The TBM actually they came out with a new derivative just a few months ago called, the TBM 900, which is the current version kind of superseding the TBMA 50. And so that's starting to happen, it's just not a big seller, in terms of ships that content. So it will be a while for that to make a measurable impact. We need to have a Lear program, get in the air. We need to have some of the other programs we've talked about. The Pilatus program is probably out there for a little while, it's a development program. I think they're hoping to fly middle or next year, don't pull me on that. And that the helicopter world, actually the helicopter development world seems to move quite a bit faster than fixed wing. So that may become more of a contributor sooner than we might have expected. And of course the Lear program, we've been working at for a while. We are well through our development effort there. We have some testing to do, but it's really up to them at this point to get the flight test program completed and get into production. And we are waiting like many other people in industry to see how that unfolds.

The next question is from Scott Lewis of Lewis Capital Management.

A question on the AeroSat side, could you say what percent of the revenues maybe in the second half you expect to be Gogo related? And then secondly, if Gogo does move ahead in a couple of years with this 2Ku technology they've discussed, what are your opportunities maybe with other providers or maybe a competing technology, if you could talk about that a little bit?

Gogo is certainly planned to be a major customer in the second half. It's possible that could be like an 80% customer. But it could be quite a bit lower than that, because we are working a fairly significant program with a foreign country, which has been underway for quite a while, which if that happens in the fourth quarter like it's currently planned, could provide a fair amount of revenue base diluting the Gogo on it. So it's a little hard to say, but Gogo is definitely planned to be a significant customer. We're familiar with the array of competitive offerings that are out there. Antenna technology is one of those things, where different design topologies have advantages and disadvantages. There is no silver bullet. And we think that our product has a solid long-term home in the Ku environment. And we understand that companies make announcements from time to time. I guess our perspective is that we're going to keep our nose down and do our jobs. And we think that based on the technical comparisons, which we're privy to. We're not concerned about being cut out, so to speak. So that's the number one. Number two, we have the flexibility of designing antennas for a wide array of applications, not only Ku, but Ka or whatever other tips that a customer wants to work with. So the limitation for us isn't necessarily the technology, the issue is can you find customers that have the market potential to justify the development excellence. And so from that perspective, while we are certainly working very closely with Gogo to further their product and their ambitions, we also are looking out for opportunities, where we might take our technology or modify our technology for other opportunities. And when and if we get close, we'll talk about those specifically. But at this point, we don't have anything to comment on.

And then last question. On the VVIP where you announced your first win a few months ago. Have you started work on that plane and how is that market looking for you?

It's looking pretty good. The capability we have is best suited for pretty large airplanes. So it's a pretty unique market. It's a universe of a couple of hundred planes. But the subscription potential there we think is very positive. And we think there are ways to adopt the product offering through a smaller class of airplanes that may want a smaller footprint antenna on their fuselage. And we're actively investigating that. So I can't tell you that that's a major contributor to our current financials, but we think it's a compelling opportunity long-term. And we are addressing it.

And the next question is from Josh Goldberg of G2 Investment Partners.

I had a couple of questions. I guess, first, as you talked at the beginning of the call, this is the first quarter without any acquisitions or anything else like that. I realized that probably some of your revenue this quarter might be seasonal. But if I just take a $170 million or $180 million or so of revenue, is that a good run rate to go on as you proceed on to the back half of the year and then to next year. And then I have a follow-up.

Well, certainly for the back half of this year, we have achieved revenue of $315 million, and we're talking about a midpoint of the range for $652 million, so you can subtract them and divide by 2. And that's what we have to average for the rest of this year. 2015 is too early to predict. We don't necessarily get into that modeling exercise until at least the third quarter call. Some times the details come out later than that. And there are certain parts of our business that are fairly predictable. There are certain parts that are a little bit lumpier or a little bit harder to understand. So as we get closer, we'll provide more clarity. For now, we're more focused on finishing up this year well.

And then just on the earnings number, like you said it was around $0.70 for the quarter with the step-up. And then in the September quarter you're going to have that issue again. And then by December will be completely free and clear. Are there any other one-time items or cost problems that could hurt you or your cost of goods and your gross profit in the back half of year?

Nothing material or we would have probably brought that up. We have quite a few moving parts at this point. And so we will always be looking to prepare ourselves for the opportunities as they come up. But I can't say that we see something that's materially going to affect us, and there are pros and the cons. Obviously, one of the things that's positive is from a margin standpoint. And from the gross margin down is that lower E&D spend as a percentage of revenue, it's 3% or 4% maybe compared to where we've been historically. But as a percentage of bottomline contribution, it's a big mover. So that's good. And as best we can tell with the new businesses, we're making good progress. So we continue to watch them pretty closely and it's possible that something could come up that could affect us one way or the other, and we'll communicate that as soon as we can. But at this point, we don't have anything like that to comment on.

Thank you. And we have no further questions in the queue at this time. I would like to turn the floor back over to management for any closing remarks.

No real closing remarks. Thanks for attending. We look forward to talking to you at the end of the next quarter. Have a good day.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.